Should I Buy EBAY Stock? 3 Pros, 3 Cons

Ending the Icahn fight doesn't solve lagging growth

After a bruising fight, eBay (EBAY) and activist investor Carl Icahn have struck a settlement.

First of all, there will be no spinoff of the PayPal unit. Instead, eBay has agreed to bring on David Dorman — who was the former CEO of AT&T (T) — to the board. However, this arrangement has not done much for EBAY stock, which is off by about 1%.

In fact, the performance of EBAY stock has been meager for the year so far, with the return at break-even. Then again, the tech sector has been hit with a selloff that has affected hot social stocks like Facebook (FB) as well as veteran operators like Google (GOOG).

So is this an opportunity to pick up EBAY stock cheaply? Let’s take a look at the pros and cons:

EBAY Stock Pros

Ecommerce Powerhouse: Over the years, EBAY has assembled a strong portfolio of assets, which include:

eBay: This is one of the world’s largest online marketplaces. In all, there are 128 million active users across the globe and about 500 million items listed.

PayPal: This is a fast-growing payments network and has 143 million active accounts in 193 market and 26 currencies.

eBay Enterprise: This segment helps companies benefit from ecommerce, like setting up and managing websites.

While Carl Icahn thinks that there are few synergies among these assets, this view does seem exaggerated. For example, eBay has been a great source of user growth for PayPal but has also provided invaluable data to lower the fraud and risk levels. On the other hand, PayPal has provided much convenience for eBay users, which has created more customer loyalty.

Mobile: The smartphone has rapidly become the New Age wallet. And that’s great news for eBay, which processed $27 billion in mobile payments in 2013. The company has also been aggressive with acquisitions to bulk up its mobile footprint. In late 2013, the company shelled out $800 million for Braintree, a pioneer in the mobile payments industry. And the potential for mobile commerce growth is enormous. According to IDC, the number of U.S. mobile shoppers is forecast to jump from 52 million in 2012 to 189 million by 2017.

Margins: eBay has a low-cost business model. All in all, the company gets its users from nonpaid sources and there has already been heavy investments in core infrastructure. So yes, eBay has juicy cash flows. Last year, they came to $5 billion (with another $12.8 billion in the bank). With that kind of money, eBay can continue its aggressive acquisition program and buy back its stock.

EBAY Stock Cons

Growth: Even though eBay is a big player in mobile, the company’s revenue growth has been unimpressive. It was only 14% in 2013. As for the current year, eBay expects revenues to range from 12% to 15%. Again, this seems out of sync with strong growth in mobile. In comparison, Amazon (AMZN) posted revenue growth of 22% in 2013 — and this was on a much higher base ($74.45 billion).

Valuation: Ebay stock is far from cheap, at least in terms of the moderate revenue growth. The price-to-earnings ratio is at 25. In other words, if there is a deceleration of the top-line, then EBAY stock could be vulnerable. And yes, there are many cheaper alternatives in the tech space. Keep in mind that Apple’s (AAPL) P/E ratio is a mere 13.

Competition: Competition is severe. Perhaps the biggest threat is Amazon, which has become a big player in mobile with its Kindle platform. The company also has other key advantages like massive distribution and an emerging same-day delivery system. On the payments side, there’s still tremendous competition. Big players like Visa (V), MasterCard (MA) and Google have entered the market. There are even signs that Apple might, as well. In other countries, there are already rivals, like Alibaba and Qiwi (QIWI), that have taken big chunks of the market.

Verdict on EBAY Stock

For nearly 18 years, eBay has found ways to adapt. And now, the company is carving out a nice position in the rapidly growing mobile market. Without having to deal with Carl Icahn, eBay can now focus on its business. That should definitely be a relief for management.

Yet, the fact remains that growth is meager. If anything, the eBay marketplaces business appears to be a drag and is overshadowing PayPal.

In light of this — as well the premium valuation on EBAY stock — there may not be too much upside for investors.

So should you buy EBAY stock? No — for now, there don’t appear to be any catalysts to get the shares moving.